Can art and antiques be an avenue for diversifying your investments? Adriaan Pask, Chief Investment Officer of PSG Wealth, looks into the matter.
A Strauss & Co auction held in Cape Town in October 2015 saw a number of records being set, showcasing the value that can be found in art and antiques as an asset class. Leading the field was a rosewood chest of drawers, formerly part of the Vergelen collection. Prior to the auction, it was estimated at between R180 000 – R200 000, but went on to achieve a South African auction record price of just under R2,500,960.00. At the same auction, the painting Women Arranging Flowers, by South African artist Erik Laubscher sold for R2,046,240.00 against a pre-auction estimate of between R1.2 million and 1.6 million.
“Results like this are exciting, and seem to show that art and antiques can be an avenue for diversifying your investments,” says Pask.
However, research reveals that globally, the average compound return on investment-grade art, held for between five and ten years, is around 4% nominal.
“Keep in mind that art is a real asset class that should at least track inflation over time,” Pask adds. This means that the real return (after accounting for inflation) will be significantly less than 4%, and may even be marginally negative depending on the period under consideration.
The value of art and antiques is subjective and prices are highly dependent on demand and sentiment, both of which are largely unpredictable. “This translates into highly volatile asset prices,” Pask says.
In addition art – particularly paintings – is subject to significant fraud risk as the art market is generally unregulated. An investor may have to rely on an assessment by a credible expert in order to confirm the authenticity of the asset or provide guidance on its intrinsic value.
“It’s a daunting thought that one could potentially part with a significant amount of money, only to end up with a fake,” says Pask.
Like most tangible real assets, art and antiques are largely an illiquid investment. Given the niche nature of the asset, buyers may be few, and even if there are interested buyers, one may be forced into a price-taker position rather than a price-maker, if the proceeds are needed urgently.
On the cost side, there are many different types of charges that may apply to investing in art and antiques, such as:
• Expert consultation
• Research costs
• Transaction charges
• Insurance costs
• Storage costs
• Maintenance
• Transportation costs
· Auction costs
As an asset class, art and antiques only generate capital gains. Generally there are no dividends or other forms of income payable. “This makes the investment less attractive relative to other more traditional real assets like equities,” says Pask.
According to research performed by Australian academics Worthington & Higgs from Griffiths Business School, although diversification benefits in portfolios comprised solely of art works are possible, no diversification gains are provided by art in financial asset portfolios.
In short, art is generally a low-return investment which is unregulated, illiquid, has high charges, produces no income and hold potentially volatile performance.
